China's central bank pumped almost US$20 billion into the banking system Thursday, it said, to ease a liquidity squeeze before the Chinese New Year holiday that has rattled financial markets.
The People's Bank of China (PBoC), injected 120 billion yuan through reverse repurchase agreements -- a short-term lending tool -- as part of its regular open market operations, the bank said in a statement, AFP reports.
Demand for funds traditionally increases before the Chinese New Year, which begins on January 31 this year, as companies pay salaries, year-end bonuses and other obligations while individuals withdraw cash for gifts and shopping.
The benchmark Shanghai stock index closed up more than two percent on Wednesday, in anticipation of another fund injection by the central bank, dealers said. However, it was down 0.50 percent Thursday afternoon following weak manufacturing data.
"The PBoC will ensure abundant liquidity to meet the seasonal (Lunar New Year) cash demand and to prevent a spike in rates,'' Bank of America Merrill Lynch said in a research report this week.
On Tuesday, the central bank injected 255 billion yuan into the system through its open-market operations.
That came a day after the PBoC said it had provided short-term liquidity to some big commercial banks, without giving the amount.
"The central bank is very concerned about potential liquidity risk in the interbank market leading into the Lunar New Year holiday period,'' Nomura International economist Zhang Zhiwei said in a research report.
Liquidity squeezes in June and December sparked worries over China's broader economy and hit the stock market -- but the funding crunches were widely seen as engineered by authorities keen to impose tighter financial discipline on banks.
China's central bank previously showed reluctance to inject extra liquidity into the interbank market as it tried to fend off potential risks to the financial system and clamp down on shadow banking that resulted in excessive credit, analysts say.
That caused spikes in the rates at which banks borrow from each other.